For every silver lining, there's a dark cloud.
Just ask Thomas Pate.
Before the Federal Reserve began cutting interest rates,
Pate and his wife of nearly 50 years went on more than a dozen
cruises, paid for, in large part, with interest income they
earned from the certificates of deposit that make up their
principal retirement savings.
But that was then. These days, while millions of Americans
cheer the government's sustained bout of interest-rate cutting,
the 68- year-old Pate and his wife, Tranquilla, have cut out
the cruises and are focused instead on taking care of the
simple necessities of life. It's been a couple of years since
they sailed off for fun.
The Pates are typical of many older Americans who have seen
their interest income diminished by the government's effort
to jump-start the economy by cutting rates a dozen times since
January 2001. Rates on CDs and money market accounts--the
"safe" investments in which retirees often are encouraged
to put their money--have dropped so low that many seniors
have seen a big decrease in the income they count on to pay
their living expenses.
For many Americans, the rate cuts have been wonderful news.
Lower interest rates have allowed them to refinance their
mortgages, freeing up hundreds of dollars per month.
Lower rates also have made it easier for consumers to buy
new cars, new houses and big-ticket items such as home appliances.
And while they haven't fueled much new corporate spending
yet, the low rates have allowed many cash-strapped companies
to save millions of dollars by refinancing expensive old debt.
But in the realm of economic policy, it's inevitable that
"some groups are going to gain at the expense of others,"
notes Marquette University associate economics professor James
Pate isn't singing the praises of cheap money.
"I'm fortunate that I have insurance that covers my
medical for my wife and me," says the South Sider, who
retired in 1993 after 32 years with the Chicago Police Department.
He says the much lower interest income from his savings is
"kind of depressing. But you make the best of it. You
don't allow anything to leave you depressed."
His police pension is a help, Pate says, but "you don't
fly to France every other weekend" on a cop's retirement
Since the Fed launched its latest round of rate cuts in early
2001, the average yield on a one-year certificate of deposit
has plummeted to just 1.68 percent from well over 5 percent.
During that same period the rate on a money market account
has slipped by just more than half, to a skimpy 0.95 percent
from just over 2 percent.
In other words, the Fed's strong medicine for the economy
is having unavoidable side effects on many seniors.
Even as their incomes drop, the costs of health care and
prescription drugs--key outlays for many elderly--are rising
at double-digit rates, putting an ever-tighter squeeze on
"They're getting squeezed by higher bills and lower
income," says Marquette's McGibany. As a result, some
retirees, who already budget more tightly than the general
population, are finding it necessary to rejoin the workforce.
"We've heard a lot from our members on this issue,"
says David Certner, director of federal affairs for the AARP,
the national lobbying group for older Americans. "They're
concerned about the impact of this lower rate on their income."
Some retirees have asked the AARP to petition Fed Chairman
Alan Greenspan to raise rates.
With such a rapid reduction in interest rates, some seniors
don't completely understand why their incomes have dropped
so drastically, says Tiff Worley, president of Auriton Solutions,
a consumer credit counseling agency. "From their perspective,
it's the banks that they deal with that are dropping the rates,"
says Worley, whose elderly clientele has doubled in the last
Many opt for safety
Many seniors have opted not to invest their money in the volatile
stock market to avoid losing their savings. That turned out
to be a good call, as the market sank and many investors lost
good chunks of principal.
But the significantly lower interest rates have forced some
seniors to find other means to supplement their income.
After losing $41,000 in the stock market in late 2000, Chuck
Werle decided to move his money into a money market account.
He hoped that the interest would help support him through
But now he's starting a public relations counseling firm
to increase his income, due in part to the persistent lowering
"What can I do? I literally felt helpless," says
Werle, 66, who retired from Chicago to Asheville, N.C., in
December 2000. "I hope the government will find some
way to make some adjustments so that senior citizens aren't
Such are the consequences of playing it safe, experts note.
In exchange for a guarantee of not losing any principal, investors
must put up with lower returns, says , a Chicago lawyer
and investment planner.
"You're trading one risk for another," he says.